World Bank arranges $206m catastrophe swap for the Philippines

by Artemis on August 14, 2017

The World Bank has been involved in another risk-linked transaction with the completion of a catastrophe swap transaction that benefits the Philippines, providing the government with a source of parametric risk transfer against losses caused by typhoons or earthquakes.

World Bank logoThe Philippines has been seeking assistance with disaster insurance for a number of years, with the World Bank working closely with the country’s government in search of a solution that would provide the risk transfer it needs in an efficient manner.

A Philippine catastrophe bond issuance supported by the World Bank had been mooted repeatedly over the years, but now it appears that the country has settled on a catastrophe swap solution that can provide it with efficient access to disaster risk capital swiftly after a catastrophic event occurs, thanks to the use of parametric triggers.

We’re told by sources that the catastrophe swap has now been completed at $206 million in size and that an announcement is imminent, which will provide further details on the arrangement.

The Philippines will benefit from a one-year source of disaster insurance protection through the catastrophe swap, we understand.

A catastrophe swap provides capacity and liquidity, by enabling a risk bearer to transfer some of its catastrophe exposure to an investor in return for a premium payment, much like reinsurance or a catastrophe bond but with less structural complexity or overhead to transact the deal.

We’re told that the Philippines catastrophe swap transaction was backed by the capital markets, including a number of the typical insurance-linked securities (ILS) funds that you would expect to see on such a transaction.

The cat swap will cover both typhoon and earthquake risks, with embedded parametric triggers able to provide a rapid payout should damaging catastrophe events occur that breach the swaps trigger points.

We’re also told that a reinsurance firm may have been involved at some point in getting the Philippines cat swap transaction to market, likely one of the larger players if so, but cannot confirm this yet.

The cat swap will provide the Philippines government with a valuable source of just-in-time risk capital that will pay out should a severe typhoon or earthquake impact the country, offering a source of disaster relief and recovery financing that will trigger in a transparent manner and very quickly after an event strikes.

The Philippines also benefits from a $500 million Second Disaster Risk Management Development Policy Loan with a Catastrophe-Deferred Drawdown Option (CAT-DDO 2), which the World Bank arranged for it in late 2015.

For the World Bank this has been an exceptionally busy few weeks, with the successful issuance of the $320 million of pandemic catastrophe linked notes (IBRD CAR 111-112) and $105 million pandemic cat swap, as well as the $360 million Mexican catastrophe bond (IBRD / FONDEN 2017).

That means the World Bank has brought almost $1 billion of risk to the capital markets and ILS investors in recent weeks, the busiest the Bank has been in the history of its time working with the ILS and catastrophe risk transfer market.

It has also come to light that a Philippines parametric disaster insurance pilot scheme has been launched, with the support of the World Bank, which could be backed by this cat swap.

Update:

Further details about the catastrophe risk transfer transaction were revealed by the World Bank, including the fact that Nephila Capital acted as one of the reinsurers of the transaction.

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